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Were Hedge Funds Right About Dumping Exela Technologies, Inc. (XELA)?

Concerns over rising interest rates and expected further rate increases have hit several stocks hard during the fourth quarter of 2018. Trends reversed 180 degrees during the first half of 2019 amid Powell’s pivot and optimistic expectations towards a trade deal with China. Hedge funds and institutional investors tracked by Insider Monkey usually invest a disproportionate amount of their portfolios in smaller cap stocks. We have been receiving indications that hedge funds were increasing their overall exposure in the second quarter and this is one of the factors behind the recent movements in major indices. In this article, we will take a closer look at hedge fund sentiment towards Exela Technologies, Inc. (NASDAQ:XELA).

Is Exela Technologies, Inc. (NASDAQ:XELA) the right investment to pursue these days? Prominent investors are getting less optimistic. The number of long hedge fund bets were trimmed by 1 in recent months. Our calculations also showed that XELA isn’t among the 30 most popular stocks among hedge funds (see the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

GREENLIGHT CAPITAL

In addition to following the biggest hedge funds for investment ideas, we also share stock pitches from conferences, investor letters and other sources  like this one where the fund manager is talking about two under the radar 1000% return potential stocks: first one in internet infrastructure and the second in the heart of advertising market. We use hedge fund buy/sell signals to determine whether to conduct in-depth analysis of these stock ideas which take days. Now we’re going to take a peek at the latest hedge fund action surrounding Exela Technologies, Inc. (NASDAQ:XELA).

How are hedge funds trading Exela Technologies, Inc. (NASDAQ:XELA)?

At Q2’s end, a total of 9 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards XELA over the last 16 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

XELA_nov2019

More specifically, Nantahala Capital Management was the largest shareholder of Exela Technologies, Inc. (NASDAQ:XELA), with a stake worth $28 million reported as of the end of March. Trailing Nantahala Capital Management was Greenlight Capital, which amassed a stake valued at $17.6 million. Gates Capital Management, Scoggin, and Avenue Capital were also very fond of the stock, giving the stock large weights in their portfolios.

Due to the fact that Exela Technologies, Inc. (NASDAQ:XELA) has witnessed bearish sentiment from hedge fund managers, logic holds that there was a specific group of money managers who were dropping their entire stakes last quarter. Intriguingly, Phil Frohlich’s Prescott Group Capital Management dropped the largest stake of the 750 funds followed by Insider Monkey, totaling close to $0.3 million in stock. Benjamin A. Smith’s fund, Laurion Capital Management, also dropped its stock, about $0.2 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 1 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Exela Technologies, Inc. (NASDAQ:XELA) but similarly valued. We will take a look at South Plains Financial, Inc. (NASDAQ:SPFI), MOGU Inc. (NYSE:MOGU), Select Interior Concepts, Inc. (NASDAQ:SIC), and Southern Missouri Bancorp, Inc. (NASDAQ:SMBC). This group of stocks’ market caps match XELA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SPFI 8 11760 8
MOGU 3 15294 2
SIC 9 37234 3
SMBC 3 15253 -1
Average 5.75 19885 3

View table here if you experience formatting issues.

As you can see these stocks had an average of 5.75 hedge funds with bullish positions and the average amount invested in these stocks was $20 million. That figure was $64 million in XELA’s case. Select Interior Concepts, Inc. (NASDAQ:SIC) is the most popular stock in this table. On the other hand MOGU Inc. (NYSE:MOGU) is the least popular one with only 3 bullish hedge fund positions. Exela Technologies, Inc. (NASDAQ:XELA) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately XELA wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on XELA were disappointed as the stock returned -46.1% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

Disclosure: None. This article was originally published at Insider Monkey.

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